Vodafone Group PLC (VOD) 2002 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Vodafone-Panafon conference call on year ended 31st of March 2003 financial results. We have with us Mr. George Koronias, Chief Executive Officer.

At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session at which time, if you wish to ask a question, please press star-one on your telephone keypad and wait for your name to be announced.

I must advise you that this conference is being recorded today, Wednesday, the 28th of May, 2003. We'll now pass the floor to your speaker today, Mr. George Koronias. Please go ahead, Mr. Koronias.

Thank you for the introduction. Ladies and gentlemen, I would like to welcome you to this conference call. Let me also inform you that with me today I have Mrs. Maria Kiani [ph], who is investor relations manager; Mr. Babis Mazarakis, who is the CFO of the company; Mr. Socrates Kominakis, who is the Commercial Director of the company. So any questions to the end may be addressed to all of us here.

So today Vodafone-Panafon announced strong results for the 12 months ended March 2003, despite tariff cuts and mobile-to-mobile interconnection effects. All ARPU and usage trends were maintained and reinforced, mainly due to the high quality of our customer base.

In the year under review, Vodafone-Panafon added the majority of contract customers in the market, increasing its usage and ARPU figures to the highest in the market. This is mainly attributed to the competitive and well-designed tariff plans and well-targeted CRM programs and the distribution network.

In detail, our revenues grew by 27% to EUR 1.255m, driven by customer growth, strong usage and ARPU growth and mobile-to-mobile termination charges. Excluding mobile-to-mobile, the revenues grew by 17.2%, close to the growth of the average customer base and due to strong usage and ARPU numbers.

Cost of sales reached EUR 612.6m, 41.6% higher versus last year. If we exclude the mobile-to-mobile effect, the cost of sales growth was 20.4%, attributed to the increased interconnection cost due to higher outgoing traffic and higher acquisition spending due to stronger contract additions, especially in the last quarter of the fiscal year.

EBITDA increased 14% to EUR 487.1m, while EBITDA margin reached 38.8%. This is 4.4 percentage points lower than last year due to the introduction of mobile-to-mobile termination charges and the increased merchandise sales following the stronger contract gross additions. Excluding mobile-to-mobile and merchandise effects, EBITDA margin reached 46.5%, reflecting the core business margin.

Selling, general and administrative expenses, excluding depreciation and amortization, totaled EUR 262.4m, 19.9% higher than last year, as they include higher bad debt provisions to cover the increased postpaid business. The year under review SG&A represented a lower percentage of total revenues compared to the previous year. This achievement reflects the continuous efforts to realize synergies and productivity.

Depreciation and amortization increased 30.3% versus last year, reflecting amortization of the extra spectrum acquired in 2G, goodwill amortization and accumulated CAPEX (ph).

Income before taxes remained flat at EUR 273.3m, despite the effects of the following one-off items -- investment write-off for the amount of EUR 11.4m, disposal of obsolete fixed assets for the amount of EUR 15.2m and the e-motion trademark write-off for the amount of EUR 5.4m. Excluding the above one-off items, income before taxes grew by 11.7% versus last year.

Losses from associated companies -- these include vis-à-vis , Vodafone Albania and Business Exchanges -- reduced significantly to EUR 30.1m versus EUR 5.9m last year, reflecting [inaudible] acquisitions, improved results and Vodafone Albania's significant performance improvement.

Net income reached EUR 161.7m, diluted by 4.5%, influenced by higher effective tax rate, which is about 40.9%, resulting from the above-mentioned one-off items. Excluding the one-off items, net income grew by approximately 10.1% versus a year ago.

Net cash available was positive at EUR 155.8m, reflecting the company's ability to fully finance its ongoing investment needs and, at the same time, reduce debt levels. As a result, net debt to equity ratio improved to .34 from .56 at the end of March 2002.

CAPEX on fixed assets for the period totaled EUR 182m, EUR 18m lower from last year's guidance of EUR 200m due to the economies achieved from Vodafone global purchasing synergies.

If we now concentrate on ARPU and usage, gross blended ARPU for the year increased 7% to EUR 30.3, compared to EUR 28.4 in the previous year. Excluding the mobile-to-mobile effect and despite tariff caps, ARPU reached EUR 27.4 versus EUR 28.1 in March 2002. In general, if we were to exclude all seasonal factors and mobile-to-mobile effect, voice ARPU increased and contributed positively to the first year revenue growth.

Blended average minutes of use for the year increased 25%, reaching 96 minutes. Even excluding mobile-to-mobile effect, usage increased 7% to 78 minutes. On the contract segment, usage grew to the record level of 233 minutes, 37% higher than the previous year.

Moving on to data revenues, including SMS and WAP, they increased by 22.3%, representing 12.6% of the service revenue. Data revenue growth is attributed to the increased data uptake following new service offering in SMS, content SMS, as well as new product initiatives, for example, MMS and Vodafone live!. Data ARPU for the year increased to EUR 3.86, while average SMS per customer reached 41 messages per month.

Regarding MMS usage, since April 2003 we recorded more than 100,000 MMS users. Specifically on Vodafone live!, we surpassed all original targets and reached in 2-1/2 months more than 25,000 customers.

All the above demonstrates the strength of the commercial strategy and the success of the new tariff plans. Customer base quality and mix, improved [inaudible] and this led to increased ARPU and usage patterns. This year contract net additions increased more than 100% and brought usage levels to a record high.

As a result of all the above, contract-based customer churn dropped to 35% and the contract inactivity in the last quarter down to 6%. In the prepaid segment, churn increased due to the change in the disconnection period policy from 12 to 18 months that took place in the previous year.

In the future, we remain confident that our simple and clear-cut tariff plans, our well-targeted CRM techniques and a strong distribution network will continue to support positive trends and further growth in ARPU and usage. Furthermore we expect a variety of innovative products and services that will prepare our customers for 3G, strong data uptake following these services, positive effects from the recent merger, as well as Vodafone global synergies.

And at this point, I would like to stop, thank you for your attention and now invite you for questions.

We will now begin the question-and-answer session. If you wish to ask a question, please the star-one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the star followed by the two. Please submit your questions. Our first question comes from Christian Konio [ph] of Smith Barney.

Hi. It's Christian Konio, Smith Barney. I just wanted to check if you can give us a bit of an outlook on what you expect for the next year in terms of revenue growth, where you see EBITDA margins trending and what you expect the CAPEX impact from the Olympic Games might be?

First of all, Christian, thank you for the question. As you are aware, during [inaudible] presentation he made a disclaiming statement in the beginning that all forward-looking statements must be viewed with skepticism and may include errors. So forward looking, we look at the continuous growth of the customer base at similar paces as we have seen this year and similar growth, both in EBITDA and a much better performance on the net operating-- on the net profit line.

The effect of the Olympic Games is not heavy on us. This is well planned and the investment has already been implemented, so it is in within the current operating plans. And I think the guidance for next year's CAPEX is at approximately EUR 200m for the whole of the network investment. Are you OK?

Our next question comes from Papi Incopopoulos [ph].

Hello, sir. Could you provide us with the year-end figures that represent the fixed mobile interconnection-- interconnect that will not be present in this year's results?

The fixed mobile interconnection that will not be present in this fiscal year's results? That is the-- fixed mobile is also included in the results. There's always a charge. This charge is varying. The current charge is EUR19 cents, right? Of course--

Actually, I'm specifically asking for the accounting treatment that has changed on behalf of OTE.

OK, I will pass you the CFO and he will answer this question.

OK. Thank you, sir.

Hello.

Hello.

The-- as you very correctly said, from-- since February 2003, which is two months before the end of the year, we changed the invoicing scheme with OTE, the fixed line operator, meaning that we invoice them now on the net amount rather than the gross amount. The effect in the fiscal year under review was insignificant, very, very small.

In looking forward, we'll follow the same scheme as implemented since February and in our disclosures for the coming period we will specifically separate the effect of this change. What we expect is that revenue will be affected downwards, but at the same time, a piece will be removed from the cost. So on the gross margin nothing will change. Margins will improve because revenue will have been inflated by the part that was grossed up and, as I said, specific figures will be given when the time comes.

I understand.

Is that OK with you?

OK. It's OK.

OK, thank you.

Our next question comes from Theodore Litsos [ph].

Hello. I have a couple of questions. The first one relates to service provider support base. This has been reduced from what we see from the breakdown by almost half versus last year. Now the question is, whether you see this coming back again to previous years' levels following the agreement with the Germanos stores?

And also, along with that, probably you can comment on the increase in the provision for doubtful accounts, as well as the finance cost, which appears to have grown substantially versus last year, despite the fact that debt levels have been reduced?

And the final question would relate to the-- if you can give us an update on the total employee stock option plan that is currently-- you have currently planned for existing and whatever going forward? Thank you.

Hi. This is the CFO speaking to answer the question. First of all, the reduction in the service provider support reflects the elimination effect, as it were, of the amount that were paid to service providers which followed the merger of those into the company. So I would not expect a rebound of this cost. All the substantive cost is included in the line, which reads merchandise cost and also in the dealers' commission. So this-- the line service provider support is not going to increase in the future.

The provision of bad debt is following the increase in the postpaid business and it's the part that we think will be appropriate, in targeting the bad debt that will be delivered from the increased customer base position. I have to say here that this year is suffering the most since we are going for the skyrocketing of the base. Looking forward, this cost is not going to be that much. Next year, we expect a very much lower number for this line.

The finance cost, this part is not the interest cost. It is reflecting all the commissions that were given to the third-party holders that buy products from us and since this piece of business has been increased dramatically in the past year, this is why the cost is increased. However, the other amount is EUR 3.7m, which is not very significant in the total numbers. The Germanos cost is already included for the year on the dealers' commission line, so that has been taken care of.

You had also a third question on the stock options. We have to say that we are in the process of evaluating the proposal that will be put forward at the annual general meeting, shareholders meeting, to see whether it will be-- the stock options that were granted back in 2000 will be finally granted.

As you know, the process varies, that the vesting period has to be also audited by Deloitte and Touche, which are our auditors, and, as I said, the final proposal will be coming forward to the annual general meeting.

Just to follow up, those options relate to the new options, but I'm pretty much referring to the new as well as the old ones as a total option size.

Yes. Currently, the only ones which have been-- which have been matured was those granted in 1998 and they are about 150,000 shares. The strike price of those, however, is about, if I recall correctly, EUR 7.5. So this is the only scheme that has been matured.

There is two still open. The one is the one that I described and the final decision on those will be taken at the annual general meeting. There's another one, which was granted in 2001 and whether it will mature or not, this will be decided in next year's annual general meeting.

Thanks.

Our next question comes from Michael Beasley [ph].

Oh, hi, there. It's Michael Beasley calling from Morgan Stanley. The first question, just a point of clarification. You mentioned that you had EUR 18m in CAPEX savings coming from global purchasing synergies. It seems like a very high number. I'm just wondering if you can clarify whether all of that EUR 18m is from Vodafone global purchasing synergies or perhaps whether there's some other savings coming in there, as well?

And the second question is on prepaid to contract migration. I'm just wondering if you can tell us what percentage of your contract net adds for the year came from your existing prepaid base? And then, also, do you have a program in place to specifically target upgrades to prepay customers?

Right. This is the CFO speaking. The CAPEX saving was indeed part of taking advantage of the global scheme. This doesn't imply that we canceled projects. We, indeed, implemented all the projects in our network we had planned but at a significantly lower price.

On the migration point, our study shows that about 10% of our gross additions of contract is coming from prepay migration. There's no specific incentive in the market to do so. It's only those customers who realize that it's for their benefit to migrate to the contract levels.

Let us keep in mind that in Greece the prepay segment is subsidy-less, without subsidies, and this makes-- may make the benefit for a prepay customer to migrate from prepay quite attractive.

Thanks very much.

Our next question comes from Vassilas Karavis [ph].

Hi. It's Vassilas Karavis with [inaudible] Hellenic. I calculate a gross margin drop of 4 percentage points of the second half of the fiscal year versus the first half. Do you see it sustainable in the next half?

The drop?

A drop of 4 percentage points of the gross margin--

In EBITDA? You're referring to EBITDA?

The gross margin, excluding depreciation.

Yes.

The gross margin [inaudible] sales.

I will say this second half was impacted by the one-off items, which were implemented and it also was impacted by the fact that the second half of the year had higher mobile-to-mobile interconnection rates than the first half. So dilution is more evident there.

Additionally, the second half had significantly gross additions on the contract side and this-- as a result, the subsidies that are common in those additions, those gross additions, impacted the second half of the year. Let me say that the gross additions were about 200,000 in the first half of the year, while on second half they exceeded 270,000.

So going forward, some of the items I described will not be present, like a differential on the mobile-to-mobile interconnection rates and the gross additions trend that was described by Mr. Koronias may yet affect the quarter or the half results of this coming year.

So even though you expect-- even such a successful performance in this half in terms of subscriber expansion, would you believe that-- still believe that the gross margin will recover?

Yes, we do believe it will recover, especially the income before taxes margin, which obviously was affected by one-off items.

OK. Thank you very much.

There are no further questions at this time, sir. Please continue.

If there are no further questions, well then--

Sir, there are no further questions at this time. Please continue.

OK. Thank you very much. So I would like to thank you for participating in this conference call and wish you a very good evening. Thank you.

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing the U.K. on country code +44, 1-452-55-0000 or free phone within the UK, 0-800-953-1533. Free phone access for USA is 1-866-276-1167 or, alternately, 1-866-247-4222. The access code is 161993 followed by the hash sign.